Investors opt out of India

Labourers try to slow down a hand cart loaded with sacks of sand at a flyover in New Delhi.
Photo: Reuters

by
Vikas Bajaj

India’s rise has captured the world’s imagination as the economy grows at nearly 9 per cent a year and a burgeoning consumer class buys mobile phones, cars and homes. Yet foreign businesses and investors, once increasingly eager to tap that stunning growth, have started to look elsewhere.

Foreign direct investment in India fell more than 31 per cent to $US24 billion in 2010, even as investors flocked to developing nations as a group.

And in the past two months, foreign investors took $US1.4 billion out of the Indian stockmarket, helping drive the country’s Nifty 50 stock index down 17 per cent from the record high it set in early November.

The decline in foreign investment highlights the challenges outsiders still face in India, two decades after policymakers started opening the country to the world.

While inefficiency and bureaucracy are nothing new in India, analysts and executives say foreign investors have been spooked lately by a highly publicised government corruption scandal over the awarding of wireless communications licences. Another reason for thinking twice is a corporate tax battle between Indian officials and the British company Vodafone, now before India’s Supreme Court.

Multinationals initially lured by India’s growth narrative might find that the realities of the Indian marketplace tell a more vexing story. Some, including the insurer MetLife and the retailing giant Wal-Mart, for example, are eager to invest and expand there but have been waiting years for policymakers to let them.

Jahangir Aziz, an economist with JPMorgan in Mumbai, says that while Indian policymakers have been seemingly ambivalent towards foreigners, other emerging economies have laid out red carpets. Lately, foreign direct investment to countries like Thailand, Indonesia and Brazil has surged. Direct investment into Brazil, for instance, jumped 16 per cent to $US30.2 billion last year, according to the United Nations.

“In a world awash with liquidity, there are many other places to fish," Aziz says.

Related Quotes

Company Profile

India’s Prime Minister,
Manmohan Singh
, said last week that global investor sentiment, rather than Indian policies, was to blame for the investment decline.

Aziz and other analysts say the slowdown in foreign money is part of a broader pullback that also includes Indian companies. Private investment as a percentage of India’s gross domestic product has fallen to about 22 per cent in the current fiscal year, from 25.6 per cent a year earlier.

Analysts say businesses are more cautious because of trouble getting regulatory approvals and uncertainty about the direction of government policies. And despite promises from Singh, executives fear he will not be able to persuade policymakers to effect changes.

In the retail industry, for instance, the country still bars foreigners from owning stores that sell more than one product brand. In insurance, MetLife cannot grow as fast in India as it can in Brazil, where it owns 100 per cent of its affiliate. Even in China, notorious for favouring local firms, MetLife owns 50 per cent of its operation.

Vodafone is battling officials who want it to pay about $US2.5 billion in capital gains tax on its $US11 billion acquisition of an Indian phone company in 2007.

The Vodafone case has other companies worried they will be subject to unexpected taxes when they try to buy and sell their investments, says Nandan Nelivigi, a partner at law firm White & Case in New York, who advises companies on investing in India.

“Foreigners don’t want to avoid paying taxes in India," he says. “But they just want to know what their tax liabilities are."